SPACs, or special purpose acquisition companies, are organizations without operations that are listed on an exchange in order to raise capital to acquire a private company. A SPAC usually has two years to merge with a target company, then the new company takes the place of the SPAC on the exchange. Acquisition targets are not revealed in advance to investors, hence SPACs are sometimes called “blank check companies.”
Though SPACs have been around for decades, they were little used until recently. In 2019, 59 were listed in the US. In 2020, the number ballooned to 248. As investors piled into the space, SPACs raised $83 billion last year. This year, they have already collected $100 billion.
Technology, fintech and green energy are especially popular sectors. Richard Branson’s space exploration start-up Virgin Galactic, fantasy sports betting company DraftKings and electric-vehicle battery maker QuantumScape all went public via SPACs.
The allure of SPACs
Why are investors flocking to blank check companies?
There are several good reasons, says Bonnie Han, Senior Director of Operations. In a sustained low-interest-rate environment, investors are seeking yield from speculative assets. SPACs also have more specific attractions.
“The process of taking a company public is much simpler than doing an IPO,” Han says. In the US, because SPACs are listed as shell companies without financial statements, there is less for the SEC to question, shortening the auditing and listing process. Sponsors also gain access to investor funds without having to go on expensive, time-consuming “road shows” to pitch their products. Travel restrictions precluded many IPO road shows last year, giving SPACs an added boost.
SPACs are also attractive to the target companies. “It’s a fast track to listing, and SPAC directors have the potential to bring target companies industry know-how as well as funding,” says Client Director Wynand Marais.
SPACs also allow retail investors, who typically lack access to IPOs, to get into early-stage companies. If the SPAC fails to find a target within two years, investors get their money (usually kept in escrow) back. And if they don’t like the target that is chosen, they can redeem their shares.
In addition to shares, investors are given warrants, which allow them to purchase future shares at a set price. Many investors sell their original shares soon after the new company is listed, but hang onto their warrants; thus, they are able to take profits early while still retaining ownership rights.
Though SPACs are the structural opposite of private equity, their speed and flexibility make them a competitive product. “With a SPAC, investors don’t have to lock up their capital for seven to 10 years,” says Caroline Baker, Manager Director of Alternative Investments in Asia.
On the other hand, private equity investors have a trove of information about the company they’re investing in, whereas SPAC investors must place their trust in the judgment of SPAC founders and directors. Most have deep experience, but because of their outsize role, investors should apply extra scrutiny.
“Investors need to look carefully at the expertise and track record of the sponsors and ask themselves if they have sharp enough eyes to nail down a good target company in two years,” Han says.
From the US to Europe
While the SPAC boom has largely been confined to US markets, interest in Europe is surging, and experts say Amsterdam is likely to be the next hot spot.
Euronext, one of Europe’s major exchanges, is headquartered there, and its flexible rules allow for SPAC listings similar to those in the US, says Commercial Director of Alternative Investments Peter van Opstal, who is based in the Netherlands and used to work for Euronext.
“The main competition is the London Stock Exchange, but investors can get locked into SPACs there. Even before Brexit and SPACs, traders were moving their trades to Euronext for its regulatory advantages. Brexit has accelerated that trend,” van Opstal says.
The exchange isn’t the Netherlands’ only draw for SPACs.
“Though it’s a relatively small country, the Netherlands has a pro-business environment, excellent universities, and qualified people in law firms and advisory companies to make such complex listings possible,” van Opstal says. “Pension funds and banks have a major presence here, and the financial sector is very well-developed.”
Amsterdam has also become a centre for fintech and other high growth companies, adds Marais, making it convenient for European SPACs to find target companies. In addition, “Once it goes public, the company will have access to favourable tax treaties, whereas in the UK, there’s a lot of uncertainty.”
Though just three of the eight European SPAC companies that went public in 2020 were listed on European exchanges, there are signs the tide may be turning. Of the four European SPACs that have listed so far this year, two have made their debut in Europe, including ESG Holdings, which listed on Euronext Amsterdam after raising €250 million.
Jean Pierre Mustier, the former chief of UniCredit, and LVMH founder Bernard Arnault are planning to list several financial-company SPACs in Amsterdam.
“We looked at the US market and decided to do it in Amsterdam instead. We thought our proposal was differentiated by taking it to Europe, particularly when we are looking to target European companies,” a source with knowledge of the deals told Reuters.
Next stop: Singapore
Asian investors have been eagerly watching the boom on US exchanges, where over a dozen SPACs based in China, Singapore and Japan have listed. Singapore-based Grab, an Uber-like company that also provides food delivery and digital payments throughout South East Asia, recently announced plans to go public through a NASDAQ-listed SPAC that has raised a record sum of nearly USD 40 billion.
Though Asia is a hub for technology start-ups, outside of China they have few listing options, making SPACs an attractive proposition. While exchanges in Hong Kong and other Asian nations are mulling over SPAC listings, Singapore is moving forward with legislation to allow them, publishing proposed rules during a public comment period that ended April 28. The government will review the feedback and determine a path forward by the end of the year, says Caroline Baker, Managing Director of Alternative Investments in Asia.
SPACs in Singapore would have their own nuances. “Singapore is trying to fix some of the challenges,” Baker says. Under the proposed rules, a SPAC would have three years instead of two to find a target, and investors would not be able to sell shares without also selling their warrants, giving listed companies greater stability. Investors would also need to meet strict eligibility requirements.
Following local guidance
Singapore is crafting its rules at a time when the US SEC is applying greater scrutiny to SPACs. The commission has questioned revenue projections it says may be overly optimistic, though so far it has not called for additional regulations and is changing its guidance on accounting procedures for warrants.
It’s important for organizations that are considering forming a SPAC to seek expert advice in the country where they plan to list so they can incorporate changing regulations, Marais says.
“SPACs have become popular because they have tremendous upside potential. But to succeed, they must also ensure that they adhere to local corporate rules.”
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